Information for all self-employeds -- independent, sole proprietor, 1099, sub-contractor, indie.
Tax law and regulations have a profound impact on all of you.
I am a practicing accountant. I post simple and easy-to-understand answers to complex tax questions asked by you -- my fellow indies.
You will learn that tax savvy and recordkeeping know-how can save you time and money as well as lower your stress and anxiety level and help form the foundation of successful self-employment.

Wednesday, February 7, 2007

Designers Dozen: Tax Saving Tips for the Graphic Artist

Take notice all you unique visual designers – whether you use Dreamweaver or Six Apart or Oil on Canvas; whether your income is $2,000 a year or $200,000 a year; whether you receive a 1099 or not: The IRS applies the same rules and regs to all of you.

That’s right, unique carries no weight with the IRS. You all must follow the same rules.

Here are some time and money-saving tips -- a Designers Dozen -- on how to simplify those complex rules to fit your unique situation. All stem from questions you have asked me or areas I know you need help in.

1. Use two offices. Forget the old husband’s tale that home office or studio is an audit red flag. The IRS has lightened up on this. Even if you work out of two or three places, if used exclusively for your work they are all legitimate deductions. Yes, both your home studio and the spare room at the beach rental where you do your three-hour morning blogging routine are deductible business expenses.

2. Work at home to increase your business transportation deduction. If you freelance at someone else’s studio you can still deduct costs for the area of your home used exclusively and regularly for your business – no matter how small the area. And by having two work places you’ll increase your deduction for auto use or public transportation costs.

Here’s why: The IRS does not allow a deduction for commuting from home to work and back. But it does allow a deduction for getting from one workplace to another. If you work in your home studio and then drive to your other studio you are now driving “from one workplace to another.” You’ve increased your business miles and the amount of your auto deduction, or made your subway trip a business expense.

This also applies to something like attending the Boston Flash Forward Conference. Creative Bostonians without a home office would not get to deduct the “T “ cost from their home to the conference.

3. Careful, no office sharing allowed. Keep in mind the all-important IRS exclusive use rule: that your office must be yours and yours only. If you’re the designer for Clyde Client and your wife handles the tech side of Clyde’s site and both you and your wife use the same office – sorry, no deduction. The way around that: make one spouse the employee of the other. BTW – there are a whole lot more benefits to hiring your spouse.

4. Hire your spouse. Even if your honey only helps you out with printer jams or errand running, pay him for it. Putting him on your payroll opens up a vast array of deductions. You can provide generous employee benefits and deduct the costs of those benefits from your design income. What kind of benefits? Well, for one thing, you can give him a medical plan that covers his family – that’s you and the kids. That would make your trip to the doctor a deductible business expense.

5. The more broadly defined your business the more deductions you can take. If you sell Web page templates for MySpace, Blogger and Moveable Type via your blog, and also generate AdSense income from the blog, and also consult on how to promote through blogging, you need to think of all that as one business. Give your work an expansive general description, like consultant to the virtual universe. Claim all the income --- every dime. Consider as a possible business expense everything you do that makes you better at making money.

6. Keep it simple. By taking the broadest possible view of all your income generating ventures you can group them as a single enterprise and thereby can really simplify your recordkeeping. But don’t stretch it beyond reasonable limits. A single business that combines dog walking and web design is just too far fetched. But that combination might very well stand up if you design only for pet stores and pet services.

7. Why do you watch TV, rent DVDs, see a movie? If it’s just for fun, no tax deduction. However, if seeing the visual art of others is vital to your own creativity, keeps you abreast of current design trends, or clues you in to the latest fashion, then consider the costs a tax deduction.

8. TV for research. Has the artistic void on network TV forced you to get cable? Well then, part of your monthly cable cost is a business deduction. And remember, the business use portion of the cost of your TV and DVD player is also a business expense.

9. Are you allowed to deduct a gift basket of fruit to Grandma? Of course you are -- if Gram has some connection to your business. Did she show you how to hook up your scanner? Make curtains for your office?

You’re an indie business and even though you may have a personal relationship with someone, that does not rule out also having a business relationship. This is particularly pertinent in gift-giving. Of course, if you bought your client a basket of fruit as a birthday present you would treat it as a business gift deduction. But what about the friends with whom you have a business connection? If dinner at a friend’s house was planned so that she could help you with your Webby’s submission, then the chocolate you arrived with is a business gift.

Of course, all the costs related to your Webby’s submission are business expenses. And when you’re the winner and head to the awards event this spring, well, your travel expenses are also deductible.

10. Deduct your laundry and dry-cleaning. Spill ink or red wine on your white silk blouse while attending an awards event? Dry cleaning and laundry while on a business trip are deductible expenses. You may also deduct the costs of the first dry cleaning bill after you return home.

But don’t get too creative and save all your winter’s dirty clothes for cleaning the day after you return from a 3-day workshop.

11. Just starting out? Final Cut Pro and Adobe After Effects not bringing in the bucks yet? No problem. Even if you haven’t yet made your first dollar as a graphic designer you may still deduct your expenses. As long as your goal is to make money, you’re in business – whether you actually make any money or not.

12. Invite the public! If your Grand Opening or gallery show is open to the public you may deduct the entire cost of food and liquor served. If it is for invited guests only, you may deduct only 50% of your costs. Note, it doesn’t matter how many people actually attend the function.

13. Discuss these ideas with your tax pro before incorporating them into your business. That’s the most important tip of all. If your tax pro isn’t aware of them … time to get a new pro!

Be sure to take a look at my 2009 money saving offer for visual artists.It 's right here.-- June

52 comments:

Hi June,I really appreciated this post, particularly the information about deducting dvds, movies, etc. Makes me wish I had been more cognizant of that in 2006! I read the advice once that smart business people try to figure out ways to turn a lot of their activities into deductions (without, of course, doing anything that's really unreasonable). I should start thinking more along those lines.

Great ideas... I wonder how far the DVDs and Movies angle can be pushed. For some people I know, this would be one of their most significant write-offs provided they had kept all of their receipts...

If one's S.O. is on the payroll as "paper jam specialist" or what have you, and they accompany you to a movie, can their ticket be counted as a deduction? Or, if one tends to work faster when listening to music in their home office, could they deduct the cost of their iTunes downloads at $0.99/pop?

Well, here's something for all creative people to keep in mind -- When an artist takes a legitimate deduction, he is not "pushing." He is taking what is rightly his. An artist is a business. An artist needs to know about the competition just like the corporate big boys do. Think like a business!

On your other questions: When you take your honey to a movie could you argue that you are both seeing that movie for business reasons? If your S.O. were your creative collaborator and paid as such by you rather than paid as clerical help, it would be a lot easier agument to make.

So, if there's a business reason to take your employee to a movie, then it's a deductible business expense.

BTW -- it could also be a Meals & Entertainment expense. But I'll save that for another post.

No, you can't deduct music because it realaxes you or makes you work better, faster, cheaper. Corporations can deduct expenses for the corporate gym and I still haven't figured out the difference between music and the gym, but I'm working on it.

June, what mileage deductions can I take when picking up supplies? If I leave the house to go to town X and get paint, etc. and come back can I deduct the whole trip, since my home is my studio and I checked on the supplies needed before leaving and then put the supplies away in the studio upon my return?Archie

You are allowed to estimate mileage. I suggest that an appoinment calendar -- manual or on computer -- is sufficient. For example, Tuesday, appt w/ client xyz; Saturday, meeting with ABC webmasters.

At year-end, if you haven't logged mileage for each appointment, then go to Mapquest or the like and figure out the distance. If you know the rough mileage to a place that you frequent, use that estimate.

For errands -- if you go to the supply store twice a month, no need to note it in your calendar. It wouldn't hurt but it's not necessary. But somewhere in your supplies receipts have proof of expenses that would warrant that many trips per year.

This is all explained more fully in my book, SELF-EMPLOYED TAX SOLUTIONS. Check it out.

I'm a new business consultant to advertising agencies. I just found your blog tonight and this is the best resource I've found for the self employed. I'm passing your Designers Dozen Tax Tips on to a host of graphic artist friends. Very helpful stuff. Thank you!

Hi June, I am self-employed and in May of 2007, I moved to a new residence. I am having trouble finding info on how to deduct a partial year for each residence my home office was located at. Please help?

In getting ready to have your return prepared you need to collect information for each home office based on the amount of time you used each. Other than the time being for a partial year there is no difference. How each gets treated on your tax return is very different if you rent rather than own.

Your tax pro will need to split your indie income proportionately between both home offices. [That's more of the tax return preparation part.]

FANTASTIC article. I have been perusing several of your blogs and this was exactly what I was looking for.

I am a contracted freelance videographer/editor so DVDS, TV and VIDEO GAMES (with cinematic cut scenes) all are very important to my business developing.

Though I had nearly 8,000 dollars in expenses and only 14,000 in income, I am still looking at around 2,500 dollars to be owed to the government. All my write offs are being placed under personal expenses. How can I sharply decrease my business taxes. (it doesn't seem right that young adult like myself should have to pay over 2,000 dollars in taxes for a business that barely grossed 6,000)

I know you can get specific with individuals but if you can just give me some key words to discuss with my tax professional, that would be great.

I don't know what you mean that all your "write-offs are being placed under personal expenses." If you had $8,000 in business expenses with $12,000 income then your net self-employed income is $4,000. These are pretty typical amounts for someone starting out in your field.

A single guy, no kids, no other income, with a net self-employed income of $4,000 should pay only $280 on a 2007 federal tax return.

How many self-employed clients does your accountant have? Print out my Designers Dozen post and ask him to read it. What's he think?

File an extension. Read more of my blog and site. Read my book. Then evaluate the skill and talent of your tax pro. It may be time to switch or maybe you can educate him!

Thanks for the great advice June. I'm glad to know that I can deduct expenses from one business meeting to another. However, where do I put that on my form? Also, will just a portion of those transportation costs be reimbursed or the full amount? Thanks!

Aloha June - I have two questions for you. I have a full-time job and recently I started picking up a lot of freelance work.

1. I often cover the costs of printing for my clients and they reimburse me after I bill them. Does the printing costs become part of my gross income when they pay me, and do I deduct that printing cost out as a supply?

2. Because of my full-time job do I need to file my fed taxes quarterly?

If I am an indie and I have hired a nanny, would it be more prudent to hire her as an employee of my business or as an employee of my household? Is there a difference?

The reason I ask is I am interested in starting a SEP, and apparently if I open one for me, then I have to open one for all my employees - so if I understand that correctly, I don't have to open one up for her if she's an employee of my household - is this accurate?

Thanks for this great article. I graduated from a graphic design school and 3 weeks ago and have just started working full time as a graphic designer, I have the receipts from the expenses during school, my mac, books, the course its self and going along to design based events. Can I claim any of these items? I use the same mac bought at school in my current position and I look at the books I have? I was also wondering if you knew about phones and phone bills if used for business? THANKS HEAPS for your time! It is wonderful being able to access this information.Jess

June , I just came accross your site.I am an Artist (Multi mediums).I recently donated two original art pieces to a non-profit charity auction. one piece sold for the full preset value price and the other for just a little under.Of course the works had market value but they also cost me time, material and other cost to produce and make them available for the sale.What, if anything should I be able to deduct?

June, I was unemployed for 13 months and during that time I began my art work again after 25 yrs..During my uneployment I spent a great deal of money from savings and credit cards to buy supplies,having prints made and joining a gallery (non-profit caharity). I sought employment, and recieved unemployment until I found full time employment in november.In December I sold two paintings through the non-profit gallery. The income from that after their share of the proceeds was far less than all my investments for my art business.What deductions do you think I may have?

To the previous Anonymous who asked about donating artwork he or she produced: I have said a lot about that topic here on this blog. Check out the "Topics/Categories/Labels" list on the left and choose the category "expenses -- donated services or products"

You went from employee to something then back to employee. You don't give enough information about what you did during the time you did something. Is the "something" you did in between considered self-employment? First you must determine that by looking at the requirements for being a self-employed in business. After you review those requirements & answer the questions honestly. If you have determined that you were self-employed then you claim the income from the sale and the expenses of your self-employment.

See the left category list. Read my posts on "being self-employed" to help you make the determination.

going to my IRS audit on jan. 18 but my attorney says he wants to go at it alone. My first audit my 3 small businesses (seasonal)and reg. job plus 1 rental property was a mess and the irs agent told my attorney, have ken straighten this mess out and i will come back. I have worked on the organization of all three for a month and with the help of junes book and cd i can explain every thing. I have under reported both income and deductions. I feel i can exlpain every thing with the lawyer there but I do not feel the lawyer will take the time like i will. MY QUESTION is I want to be there when the irs asks questions. I am license in all 3 businesses and I have visted the irs web so many times they know me well. I will pay of course but my situation is a little different. Great book june and cd. Ken

By this time I'm sure you have finished your audit. I hope it went well.

As I said in a Valentaine's Day post:

In an audit it depends on the tax pro and the taxpayer as to which one, or both, should handle the audit. I've had some clients who, with my coaching, did great by themselves. Other clients I would not let near the IRS. Years ago a client went to her own audit. She told the IRS auditor that she paid more in taxes in a year than the IRS auditor earned in a year. That audit did not fly well.

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About June Walker

Author, practicing accountant, workshop leader and seminar speaker -- been a tax and financial adviser to self-employed people since 1979.
My talented and gifted clients work and live throughout North America and Europe. This diverse array of independent professionals, I call them indies, includes any one who works for him- or herself -- psychologists, carpenters, IT consultants, life coaches, bloggers, realtors, and attorneys. I also counsel a large number of people in the arts -- actors, writers, graphic artists, gallery owners and musicians. Before moving to Santa Fe in 1995 I had offices in New York and New Jersey.
Over the years I have developed an educational approach to my work. Whether with clients or in writing and seminars I teach self-employed people that, although written for the corporate world, the tax laws and regulations can work to an indie’s advantage.

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Please note!

The purpose of this blog is to provide self-employeds with accurate and authoritative information about the business side of their indie ventures. All the information and opinion presented is for general information only and should not be acted upon without consulting your own tax professional.